In the good books
Appen (APX) was upgraded to Neutral from Underperform by Macquarie
Macquarie has lowered FY22-24 underlying earnings estimates for Appen by -56-61%, adjusting for the latest company guidance. Guidance is being driven by weakness in the company’s global services revenue, in the broker’s view, which in turn is being impacted by large market-share loss from its major customers. Appen’s de-rating may have largely now played out, but a material recovery is not forecast until 2025 the earliest. On limited further downside, Macquarie upgrades to Neutral from Underperform. Target falls to $2.70 from $3.30.
Block (SQ2) was upgraded to Outperform from Neutral by Macquarie
Macquarie notes Block’s cash app deposits had a record September quarter and Square is seeing some success in the large seller cohort, although Afterpay remains uncertain. The shares have fallen -20% since the broker downgraded to Neutral in July on market and earnings risk. With Block shares now de-rated and operating leverage flowing through, Macquarie upgrades to Outperform on improved upside/downside positioning across shares and fundamentals. Target rises to $145 from $130.
Charter Hall Retail REIT (CQR) was upgraded to Buy from Neutral by Citi
Upgrading on Charter Hall Retail REIT, Citi has indicated a preference for defensive convenience retail exposures over discretionary retail at this stage in the consumer cycle. The broker remains relatively constructive on underlying demand for consumption, but expects rising rates will start to play a larger role in consumer spending. Citi found commentary from Charter Hall Retail REIT to present a relatively stable outlook. The rating is upgraded to Buy from Neutral and the target price of $4.30 is retained.
City Chic Collective (CCX) was upgraded to Buy from Neutral by Citi
While acknowledging the current consumer environment is likely to challenge City Chic Collective’s top line and margin results, Citi remains positive on the company’s long-term international growth prospects. According to the broker, City Chic Collective has “significant room to expand” in the global plus size women’s clothing market, which it estimates to have a worth of US$180bn. The rating is upgraded to Buy from Neutral and the target price decreases to $1.74 from $2.09.
Computershare Limited (CPU) was upgraded to Outperform from Neutral by Credit Suisse
Credit Suisse raises its forecasts for Computershare as trends in aggregate for cash rates, FX movements and activity will be positive for US dollar earnings, and even more so for Australian dollar earnings. The analyst feels the current share price neglects the up to $6/share of excess capital available courtesy of future debt headroom and proceeds from the potential exit from mortgage servicing in the US and UK. It’s thought funds may be used for buybacks/M&A. The rating is upgraded to Outperform from Neutral and the broker’s target rises to $29 from $25.
Pilbara Minerals (PLS) was upgraded to Hold from Lighten by Ord Minnett
Ord Minnett has upgraded spodumene forecasts to US$6,500/t for 2023 and US$5,700/t for 2024, increases of 44% and 66%, respectively. The broker’s FY24 net profit forecasts are, on average, circa 90% above consensus for the producers. Pilbara Minerals upgraded to Hold from Lighten, target rises to $5.10 from $4.20. This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
Suncorp Group (SUN) was upgraded to Equal-weight from Underweight by Morgan Stanley
Higher investment yields and ongoing price increases, which should cover rising input costs, prompt Morgan Stanley to upgrade Suncorp Group’s rating to Equal-weight from Underweight. Capital is on the improve while CAT costs are being held at bay. The broker also raises its target to $11.30 from $10.20. Industry View: In-Line. Ongoing elevated inflation and rising reinsurance rates are allowed for in forecasts. The analyst points out the recent business interruption court decision aides capital flexibility and notes better margin prospects for the bank. Overweight-rated QBE Insurance is preferred by Morgan Stanley in the space.
In the not-so-good books
Baby Bunting (BBN) was downgraded to Neutral from Outperform by Macquarie
Following Baby Bunting’s AGM trading update, Macquarie has reduced its gross margin assumptions by -200bps in FY23. Upon further review, the broker expects FX rates to provide more substantial headwinds than previously anticipated. The Playgear category is also a key concern, being high margin discretionary. Sales expectations are nevertheless unchanged, and Macquarie remains positive on the ability to deliver revenue growth. But on margin compression, downgrade to Neutral from Outperform. Target falls to $2.80 from $4.95.
Sims (SGM) was downgraded to Neutral from Outperform by Macquarie
Credit Suisse slashes its target price for Sims to $12.20 from $19.40 and downgrades its rating to Neutral from Outperform. These changes follow an AGM trading update where management revealed maiden 1H FY23 earnings (EBIT) guidance of $65-75m compared to the $168m expected by consensus and the $182m forecast by the broker. The company noted slower economic activity has led to lower scrap volumes, while gross margins fell as competitors bid for feed to maintain volumes to cover fixed costs. Also, cost initiatives only partially offset inflationary pressure. Of greatest concern to the analyst is the gross margin decrease from the 2H of FY22 to 18.5% from a consistent five-year range of 21-22%. It’s felt weak industry scrap volumes will persist for over two years.
Temple & Webster (TPW) was downgraded to Underperform from Neutral by Macquarie
While current market data suggests consumer spending is holding above pre-covid levels, Macquarie anticipates macroeconomic conditions to continue to put pressure on consumer spending. Increasing interest rates and slowing housing turnover do not bode well for consumer product companies that have benefitted from a covid-induced pull-forward of demand, and are therefore cycling tough comparables, the broker warns. Online sales have rapidly declined, reverting to pre-pandemic trend. Temple & Webster’s target falls to $4.00 from $5.80, downgrade to Underperform from Neutral as an online pure-play.
The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stockbrokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS. Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
